Massmart disaster

Massmart’s trading statement for the 26 weeks ended 26 June 2022 spooked investors. It revealed another mammoth loss which sent the share price plummeting.

The retailer expects a net loss of between R1.05 billion and R1.16 billion, down from the previous half-year loss of R1.09 billion.

Sales from continuing operations increased by 1.9% for the 26 weeks ended 26 June 2022, while sales from discontinued operations fell 19.7%.

Massmart’s share price plummeted by nearly 20% following the news, showing investors lost trust in the retailer.

Massmart tried to do damage control by offering explanations for the poor performance, including:

• Inventory cost inflation grew faster than sales inflation which put additional pressure on the group’s profit margins.

• Massmart needed to settle a once-off lease exit settlement amounting to R184 million related to the Riverhorse Distribution Centre that was destroyed in the 2021 July civil unrest.

• This settlement, along with other expenses related to the civil unrest, created a higher opening net debt balance for the group, which increased finance costs for the 26 weeks.

Massmart added that it had received a second interim payment of R270 million as part of its business interruption insurance claim, bringing the total insurance payments received to R370 million.

It is in discussions with insurers to receive its final insurance payment before the end of the year.

Delving deeper into its numbers reveals why investors are dumping Massmart’s shares.

For fifteen years – between 2002 and 2017 – Massmart consistently grew revenue. However, in 2018 the company struggled to maintain growth.

From 2020, the retailer’s revenue plummeted, and it has not been able to recover by any meaningful measures.

The Covid-19 lockdowns and 2021 store looting have dramatically affected the group.

Since the slowdown in revenue growth in 2018, a clear impact can be seen in the group’s net income.

Since 2019, Massmart’s net profits have plummeted. Although revenue has not been affected as severely, the losses have continued to increase into 2021.

If the most recent earnings results continue, the 2022 financial year will be no exception from the recent loss-making trend.

Massmart gives hope with online growth

Massmart’s financial performance over the last three years points to a company in big trouble, but it gave investors some hope with strong online sales.

In its 2021 year-end analyst presentation, Massmart reported impressive online sales growth with a 47% increase in online revenue and a 113% increase in online orders.

The company has also improved its logistics, with 96% of orders delivered on time.

In response to this growth, Massmart increased its 2022 capital expenditure and allocated 72% of its capital to eCommerce and store revitalisations.

Massmart revamped its Makro, Game, and Builders Warehouse stores to improve the in-store experience and grow the shoppable range.

The group has faced severe headwinds over the past two years by external factors beyond its control.

It is now allocating significant resources to recover from the downturn and position the company for growth.